Komatsu CEO Sees China Construction Rebound Next Fiscal Year

Komatsu Ltd., the Japanese maker of construction equipment whose sales have fallen for seven consecutive quarters in China, expects demand from the Asian nation to recover this year, aided by stimulus spending.

The world’s top producer of diggers and the second-biggest maker of bulldozers and dump trucks after Peoria, Illinois-based Caterpillar Inc. forecasts China demand to grow 5 percent to 10 percent in the year starting April 1, said President Kunio Noji. The yen’s slide to its lowest since May 2010 will also help boost competitiveness, he said.

“Demand in China will definitely improve,” Noji said Feb. 13 in an interview at Komatsu’s Tokyo headquarters. “Our company will see an immediate earnings improvement once demand recovers because we don’t have any excess stockpiles and are able to speed production.”

Total retail sales of construction equipment in China, the world’s biggest market, slid about 19 percent in 2012 to $32.3 billion, according to data compiled by Bloomberg. While construction may rebound after China’s Lunar New Year holidays, inventory levels may weigh on excavator production, said Karen Ubelhart, a Bloomberg Industries analyst in New York.

The yen, which last week traded as low as 94.46 to the U.S. dollar, is about 7 percent weaker than the 88 yen the company has budgeted on for the current quarter. A drop in the currency’s value bolsters Japan’s exporters when overseas earnings are repatriated.

China Unit Sales

Komatsu’s unit sales in China may match year-ago levels for the current quarter after a peak decline of 60 percent earlier in the fiscal year, Noji said.

China’s gross domestic product rose 7.9 percent in the final three months of 2012 from a year earlier, halting a seven-quarter deceleration. The World Bank forecasts economic growth in the Asian nation will accelerate to 8.4 percent this year, more than four times the pace of the U.S., and versus a 0.1 percent contraction in Europe.

Komatsu rose 0.8 percent to 2,416 yen at the close in Tokyo. The stock has climbed 11 percent this year, compared with a 6.7 percent increase for Caterpillar and a 16 percent gain for China’s Sany Heavy Industry Co.

The Japanese currency traded at 15 yuan as of 3:58 p.m. in Tokyo. Komatsu last month forecast the yen would trade at 14.1 yuan this quarter, weakening from 12.8 yuan in the previous quarter, according to a Jan. 29 presentation.

Yen Effect

Komatsu forecasts that each one yen decline against the dollar will boost operating profit by 1.4 billion yen ($15 million) for the current three months, while every 0.1 yen decline against the yuan will increase earnings by 100 million yen in the period.

The yen’s depreciation has boosted the outlook of Japanese exporters from Toyota Motor Corp. to Komatsu, whose Japan-made components and heavy machines account for more than half of its global manufacturing.

The weakening of the yen will push up Komatsu’s operating profit by about 23 billion yen in the quarter ending March 31, exceeding the company’s Jan. 29 estimate of a 15 billion yen gain, Noji said. Similar windfalls will follow next year should the yen stay at current levels, he said.

“Benefits of the currency will be big if the yen stays low and the decline isn’t short-lived,” Noji said.

Komatsu’s exposure to China is set to decline to 8 percent of total sales of construction and mining equipment in the current fiscal year from 12 percent the previous year.

China passed Japan as Komatsu’s biggest regional market by percentage of sales in the fiscal year ended March 2011 only to fall to fourth place the following year as growth in Asia’s biggest economy stalled.

(Updates with closing share price in eighth paragraph.)
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